After Demo Day: The Debrief from Y Combinator Startup FutureAdvisor

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The explosion in incubators for early stage tech companies has spawned a familiar startup storyline: A team of bright founders hits on a promising idea, builds a prototype, and applies to one of the big-name programs. After they get accepted (or sometimes even if they don’t), it’s off to the races for a few intense months of coding, meetings, demos, late nights, long weekends, and camaraderie.

And when it’s over, a big demo day where everyone shows off their hard work—and hopefully lands some investment to really get things going. Not as much ink is spilled about that day-after reality, when the wunderkind founders get to work actually building a business.

FutureAdvisor is a Web-based software service for individual investors who want help maximizing their retirement savings, but don’t have enough money to get the attention of a traditional financial advisor who typically focuses on bigger fish—all the better to earn fees.

FutureAdvisor focuses on index investing, a growing trend that eschews professional mutual fund managers in favor of pegging investments to stock market indexes compiled by financial firms, like the S&P 500 or the Russell 1000. FutureAdvisor is still in a beta phase, but says it’s now able to offer services to employees at the 15 biggest companies in the greater Seattle area, with many more in the pipeline.

The company was founded by Bo Lu, 28, and Jon Xu, 32, who met while working at Microsoft on a “skunkworks” project called Catalyst, which eventually became part of the new Windows Phone system—Lu worked on the technology that would become the all-in-one social networking feature on Windows Phone 7, and Xu helped build the system that tied together instant messaging and text messaging.

Once they knew they worked well together, and felt they’d been bitten by the entrepreneurial bug after working on a 40-person team inside the behemoth of Microsoft, Xu and Lu ran through some side projects until hitting upon the idea that would become FutureAdvisor. It’s actually based on a problem that Lu, an active investor since the age of 16, had seen with friends: People wanted his advice on how to allocate their money, but didn’t have the time, patience, or acumen to keep up with the homemade spreadsheet he’d been using since he was a teen.

“Immediately, Jon and I were like, ‘That looks like a software problem,'” Lu says. “So we made something, and we applied to Y Combinator with a super-ghetto prototype that, at the time, had my Fidelity credentials in the code base.”

“But at least it was fast,” Xu says with a smile.

That was the spring of 2010, and the idea that would become FutureAdvisor was just taking off on its wild ride. Fast forward to today, with a team of eight people pretty evenly split between financial and technical expertise, working out of a historic building in Seattle’s Pioneer Square.

They’ve landed financial backing from Silicon Valley venture capitalists, although the amount and investors haven’t been publicly announced yet, and are advertising on social and professional networking sites to recruit more customers.

And they’re still working to add more companies to their database—a painstaking task that requires importing all of the retirement account options available to any given company’s employees, so that when new customers log in, their options show up automatically. (As they note below, FutureAdvisor recently added a big fish to the collection in their old employer, Microsoft.)

Here are Xu and Lu’s lessons from the first few months of living out in the wild.

BUILDING A BUSINESSBO LU: “You spend a lot of time in the incubator building a product … once you’re out of the incubator, you spend a lot of time on scalable economics. Which is not something that we as hackers ever did. So rather than staring at code all day, we felt like we stared a lot more at spreadsheets. How much it costs to acquire a customer, how would this channel do, and all of those things.”

HELP WANTED JON XU: “Shortly after Y Combinator … we were faced with, ‘Well, do we come back here? What do we do? And I think we’d always thought that this was a good area to start a company, but also, more importantly, we knew our technical networks were pretty deep up here, having been from Microsoft.”

BO LU: “This is a unique vein of talent. And we found … after comparing notes with our batch-mates who stayed in the Bay, that it was easier for us to recruit here. We had a much higher accept rate of offers, and it just wasn’t as nuts. So over PG’s [Y Combinator founder Paul Graham] strident objections, we moved.”

JON XU: “Really, you’ve got to get down to actually building a team. Building a machine that generates the actual products.”

BO LU: “No one learns how to hire during the incubator. They all learn how to hire afterward. And they all learn it on their own. … And when you compare notes, some teams do really well and some teams do really, really poorly.”

HAND-TO-HAND COMBAT JON XU: “A lot of times to get your business started, you need to do some hand-cranking. It’s not going to be a skyrocket all the way, but there’s definitely this grind of hand-cranking the engine to get it started.”

“Because we deal with retirement products, quite often it’s knowing what investment options are in people’s 401(k) plans. … So we’re hand-cranking, essentially company by company in the Seattle area, and we actually launched Microsoft—that was a big milestone for us.”

BO LU: “Every day’s just like every other day. You make your own progress, and you make your own headway. So there are great days, like when you launch to a new company, and there are not-so-great days, like when you launch to a new company and a bunch of bugs are discovered. So that’s where we are.”

STAYING CONNECTED JON XU: “The way I’ve heard it put, from one of our friends who founded Posterous, was that quite often after the Y Combinator experience where you have such a deep network of like-minded entrepreneurs that you’re dealing with, you kind of go your separate ways to build your own teams, and you kind of have to establish a culture for your own team. So very much by design, you have to spend a lot of time building that up rather than being interconnected with various other companies.”

COMPETITION (OR NOT) BO LU: “People are always like, ‘Oh, what’s it like competing against financial advisors?’ And the answer is, we don’t compete with financial advisors—financial advisors love us. Which I never thought—that was super-surprising.”

“We meet with a financial advisor, and they’re like ‘Oh my God, I wish that I could give some service to the people who come to me who don’t have enough money for decades. But I can’t do it, my friends won’t do it, no one will help these people, and so I end up doing pro bono work just to be nice and be part of the community.’ But he’s like, ‘Man, if somebody could help these guys cost-effectively, that would be awesome, because I don’t have a business model to do that with.'”

Great write-up, definitely can’t wait to see where this team ends up. They have a pretty solid product…

I wrote a small review comparing Betterment, Wealthfront, and FutureAdvisor last month. Another that I’ll be adding is Smart401k (another in the growing list of startups in this space). They are right that the competition isn’t in the financial advisor space, but they certainly have a growing list of competitors in the online financial advice space…